Monday, December 13, 2010

Verizon is using their MBA

I recently noticed that Verizon Wireless applied some typical MBA know how to their pricing scheme for smart phones. The old data options from Verizon were to either buy an unlimited everything (data, text, pix, and flix), or a multimedia package (text, pix, and flix). The former was $29.99, while the latter was $9.99. What this essentially did is charge light users of data the same as very heavy users and there was no difference in speed that was offered.

Verizon’s latest pricing includes differentiation in price for total data used for a month and connection speed. The premium is for faster service and/or greater data usage.

This is a concept affectionately referred to as price discrimination. They figured out that different folks are using their bandwidth differently and thus value that bandwidth differently. Now, its not pure discrimination because VZW is actually offering slightly differentiated products, but they are essentially charging different customers different prices based on their willingness to pay.

Other examples of price discrimination include a student or senior discount, in-state college tuition, and corporate discounts. In all of these situations businesses are trying to increase their overall profitability by selling to people at the maximum price they are willing to pay.

Obviously Verizon has a few MBA graduates on their payroll. Nice work VZW.

Tuesday, December 07, 2010

Lessons from Business School - Economic Value Estimate

The Chevy Volt was recently released for mass production and will soon be available at a Chevrolet dealer near you. This car has been released to much fanfare and is being hailed as the first electric car that he general public will purchase. The biggest reason for this is the vehicle’s range on a single battery charge.

About a year ago, I read about the Volt and was very excited about the prospect of a legitimate electric car. After reviewing the specs and the range, the first thought I had before I could decide if I would purchase pone is “how much is Chevy going to charge?” A year later Chvy announced a price of approximately $40,000 for the vehicle (depending on options). The announcement of the price was timed very well with the pricing class that I began back in September. One of the very first concepts that we learned will allow me to share a very valuable Business School lesson with you…. The EVE (Economic Value Estimate).

The framework is actually pretty simple. You just take the price of the closest alternative, add the difference in benefit (positive or negative), and adjust for qualitative factors such as a fast adoption product strategy. Here’s a quick back of the envelope on how the Volt may have been priced…

Folks who buy the volt are probably the same people who bought a Toyota Prius, Civic EX, or Focus Ltd. So let’s tak the value fo these cars on average… say $24,000. Now add the cost savings that an owner would experience using electricity instead of gasoline over the expected useful life the car (Let’s say 10 years at $1,000/year). So now we have $24,000 + $10,000. Finally, add in the reduced maintenance costs and some amount for the novelty of owning the first mainstream electric vehicle. Let’s say that amounts to ~$8,000 over the life of ownership. The grand total is $24k + $10k + 8K… $42K. $42K is the price ceiling (the highest price that should be chosen for the vehicle based on the value it represents to a potential owner. The floor is the cost of the next best alternative, or $24,000 in this case. Chevy should then choose a place in this spectrum depending on their strategic goals. Since Chevy is just recovering from bankruptcy and the popularity of the Volt is high, the price they chose seems reasonable. If they wanted to push inventory a bit more to gain some sales momentum, the may have priced $2k, $4k, or $6k lower.

It will be interesting to see how the Volt does… about 1 year from today, we will see if the Volt’s pricing analysts got their money’s worth from their respective business schools.

Friday, December 03, 2010

Real Life Business Education: China & Hong – Finally, Hong Kong

A group of four of us left our hotel with a driver and a guide named Sunny. It wasn’t very long that we realized Sunny was probably just as excited to be going to Hong Kong as we were – I don’t think she actually gets over there much.

It was starting to get dark as we approached the border. 30 minutes later it was pitch black as we made our way from the boarer into Hong Kong. We arrived in the city and finally landed in Lan Kwai Fong. We spent the first 30 minutes exploring the general area before we finally found an outdoor courtyard with a few different restaurants. As we walked into the courtyard, several restaurant owners/workers met us with menus and began attempting to persuade us to eat at their respective establishments. We settled on Thai and enjoyed a nice meal for only about $10 per person. The food meal I ordered ended up being some of the best Thai curry I’ve had.

For the rest of the night, the group of us hopped through a few bars, explored a few streets, and tried to stay dry. Did I mention it was raining?

The night actually ended pretty early… at around 10PM everyone in the group headed back to the JW Marriot and I checked into the Metro Park hotel in Kowloon Hong Kong. I spent the next day there as well before catching an evening flight out of HKG. With a full belly from all the bakeries and restaurants I visited in Hong Kong I rode the hotel shuttle back to the airport. I got there with plenty of time to spare and boarded the plane for home.

On the way home, I couldn’t help but to be excited about all I had learned. This trip truly was a real life business education. From my time in Beijing to the rainy streets of Hong Kong, I had the opportunity to entrench myself in a new culture and business on a continent that a week earlier had seemed light years away. This was a very valuable trip.

Wednesday, December 01, 2010

Real Life Business Education: China & Hong – Shenzhen

I woke up around 7AM on Friday and headed over for a meeting in downtown Shenzhen. The meeting was on the 50th floor of a high rise glass and steel building – incredible views. This was the first chance I had to actually go inside one of the Shenzhen sky scrapers that had been thrown up at break neck speed. At first glance, the building looked like something you would find in an upscale part of a US city. The lobby was large and open and there was an Illy coffee stand near the elevators. A key card was required to go to the elevator lobby and people were dressed business casual for the most part.

Once up to the 50th floor, I began to inspect the building more closely. Behind the sealed concrete floors and glass walls, doors, and cubicles, was some pretty shotty construction. Cables were exposed on the walls and simply painted over. The corners and thresh-holds didn’t quite line up right, and the windows and doors weren’t all straight. As I stared out the window at the sweeping views, I began to wonder what would happen if there was an earthquake.

After the last meeting ended, we headed back to the JW Marriot and got ready for evening trip to Hong Kong.