7007 REV: AUGUST 5, 2016
TEACHING NOTE
Universal Rental Rental Car Car – Prici Prici ng Simul Simul ation
This guide was prepared by Professors Professors John T. Gourville, Thomas T. Nagel, and John Hogan for the sole purpose of aiding classroom instructors in the use of Universal Rental Car - Pricing Simulation (HBP No. 7005). This guide and the simulation are developed solely as a basis for class discussion and are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2011 Harvard Business School Publishing. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means —electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business Publishing. Harvard Business Publishing is an affiliate of Harvard Business School. This Teaching Teaching Note is authorized for use only by Harish Ugraiah, HE OTHER until August 2018. Copying or posting is an infringement of copyright.
[email protected] [email protected] or 617.783.7860.
QUICK START STA RT GUIDE KEY INFORMATION Auth Au th or
John T. Gourville, Tom Nagle and John Hogan
Players / Scenarios Scenarios / Roles
Single, multiple scenarios
Asyn As ynch chro ro no us Play Po ssi bl e?
Yes
In-Class or Out-of-Class Play
Out-of-class
Teaching Points
Consumer sensitivity to price, Heterogeneity of Demand, Inventory management, Economics of Pricing decisions,
Target Audience
Undergraduate, graduate, or executive students in any course where the above subjects are taught
Acc om pan ying yi ng / Sup plemen pl emental tal Mater ials ial s
Teaching Note, Dynamic Debrief PowerPoint
Appr Ap pr oxim ox imate ate Ti me Requ ir ed
Variable
RUNNING RUNNI NG THE SIMULATION SIMUL ATION Technical specifications specifications for this simulation can be found here: A.) Tech Specs B.) System Check The typical steps for setting up and running this simulation are: 1.
Tailor the simulation as you like by visiting the Faculty Administration Scenarios section
Simulation
Setup
Manage
2.
Open the simulation for play
3.
Frame the simulation for for your students students in class, class, using page 4 in the Teaching Note as a reference.
4.
Allow your students to play.
5.
Debrief the the simulation, simulation, using the Teaching Teaching Note to help prepare or guide your discussion.
See also: Introduction, Introduction, Adopting the Simulation Simulation and Enabling Enabling Student Access Access
LEARN MORE To learn more about this simulation, carefully review the Teaching Note and take advantage of any or all of the following resources:
Free Trial
Instructional Videos
Author Videos
How to Play
Simulation Preview
Webinar Recording
Getting Started
Debrief
For these and other resources visit: hbsp.harvard.edu/cbmp/pages/demo/7005
2 HARVARD BUSINESS PUBLISHING | UNIVERSAL RENTAL CAR – PRICING PRICING SIMULATION This Teaching Teaching Note is authorized for use only by Harish Ugraiah, HE OTHER until August 2018. Copying or posting is an infringement of copyright.
[email protected] [email protected] or 617.783.7860.
QUICK START STA RT GUIDE KEY INFORMATION Auth Au th or
John T. Gourville, Tom Nagle and John Hogan
Players / Scenarios Scenarios / Roles
Single, multiple scenarios
Asyn As ynch chro ro no us Play Po ssi bl e?
Yes
In-Class or Out-of-Class Play
Out-of-class
Teaching Points
Consumer sensitivity to price, Heterogeneity of Demand, Inventory management, Economics of Pricing decisions,
Target Audience
Undergraduate, graduate, or executive students in any course where the above subjects are taught
Acc om pan ying yi ng / Sup plemen pl emental tal Mater ials ial s
Teaching Note, Dynamic Debrief PowerPoint
Appr Ap pr oxim ox imate ate Ti me Requ ir ed
Variable
RUNNING RUNNI NG THE SIMULATION SIMUL ATION Technical specifications specifications for this simulation can be found here: A.) Tech Specs B.) System Check The typical steps for setting up and running this simulation are: 1.
Tailor the simulation as you like by visiting the Faculty Administration Scenarios section
Simulation
Setup
Manage
2.
Open the simulation for play
3.
Frame the simulation for for your students students in class, class, using page 4 in the Teaching Note as a reference.
4.
Allow your students to play.
5.
Debrief the the simulation, simulation, using the Teaching Teaching Note to help prepare or guide your discussion.
See also: Introduction, Introduction, Adopting the Simulation Simulation and Enabling Enabling Student Access Access
LEARN MORE To learn more about this simulation, carefully review the Teaching Note and take advantage of any or all of the following resources:
Free Trial
Instructional Videos
Author Videos
How to Play
Simulation Preview
Webinar Recording
Getting Started
Debrief
For these and other resources visit: hbsp.harvard.edu/cbmp/pages/demo/7005
2 HARVARD BUSINESS PUBLISHING | UNIVERSAL RENTAL CAR – PRICING PRICING SIMULATION This Teaching Teaching Note is authorized for use only by Harish Ugraiah, HE OTHER until August 2018. Copying or posting is an infringement of copyright.
[email protected] [email protected] or 617.783.7860.
Table Ta ble of Contents Universal Rental Car – Pr icin ic in g Simu lat io n ................ .............................. ............................ ............................ ............................ ............................ ............................ .................... ...... 1 Gettin Gett in g Star ted ........................... ......................................... ............................ ............................ ............................ ............................. ............................. ............................ ........................... ........................ ........... 4
Overview ........................... ......................................... ............................ ............................ ............................ ............................. ............................. ............................ ............................ ........................... ................. .... 4 Before Getting Started Started.............. ............................ ............................ ............................ ............................ ............................ ............................. ............................. ........................... ........................ ........... 4 Introduction ............................ .......................................... ............................ ............................ ............................ ............................ ............................ ............................ ............................ ........................... ............. 4 Configuration Options........................... ......................................... ............................ ............................ ............................ ............................ ............................ ............................ ........................... ............. 5 Framing the Simulation for Students ..................................... ................................................... ............................ ............................ ............................ ............................ ...................... ........ 6 Learning Objectives and Teaching Opportunities ............... ............................. ............................. ............................. ............................ ........................... ........................ ........... 7 1. Consumer Sensitivity to Price..................... ................................... ............................ ............................ ............................ ............................ ............................ ........................... ............. 8 2. Heterogeneity of Demand across Customers, Markets, and Time .......................... ........................................ ............................ .................... ...... 11 3. The Economics of Pricing Decisions ................... ................................. ............................ ............................ ............................. ............................. ........................... ............... .. 13 4. The Role of Inventory Management .................................. ................................................ ............................ ............................. ............................. ........................... ............... .. 14 5. Competitive Response .......................... ........................................ ............................ ............................. ............................. ............................ ............................ ........................... ............... .. 15 6. General Economic Conditions.................................... .................................................. ............................. ............................. ............................ ........................... ...................... ......... 16 Techni Tech ni cal Guide Gui de ............................ .......................................... ............................ ............................ ............................ ............................ ............................ ............................ ............................ .................... ...... 18
Adopting the Simulation Simulation and Enabling Student Access Access ........................... .......................................... ............................. ............................ ........................... ............... .. Simulation Overview........................... ......................................... ............................ ............................ ............................ ............................ ............................ ............................ ........................... ............. User Screens...................... Screens.................................... ............................ ............................ ............................ ............................ ............................ ............................ ............................ ......................... ........... Analyze Price History............................ .......................................... ............................ ............................. ............................. ............................ ............................ ........................... ............... .. Analyze Market Demand........................................ ...................................................... ............................ ............................ ............................ ............................ ........................... ............. Analyze Unit Sales............................ .......................................... ............................ ............................ ............................ ............................ ............................ ............................ .................... ...... Analyze Fleet Size .......................... ........................................ ............................ ............................. ............................. ............................ ............................ ........................... ...................... ......... Analyze Capacity Utilization...................................... .................................................... ............................ ............................ ............................ ............................ ......................... ........... Analyze Market Research............................ .......................................... ............................ ............................. ............................. ............................ ........................... ...................... ......... Analyze Net Income............................ .......................................... ............................ ............................ ............................ ............................ ............................ ............................ .................. .... Analyze Breakeven Calculator ............................ .......................................... ............................ ............................. ............................. ............................ ........................... ............... .. Decisions Panel............. Panel........................... ............................ ............................ ............................ ............................ ............................. ............................. ............................ ........................... ............... .. Decide Post Your Strategy......................... ....................................... ............................ ............................ ............................ ............................ ............................ ......................... ........... Archived Runs Runs ........................... ......................................... ............................ ............................ ............................ ............................ ............................ ............................ ............................ .................. .... Faculty Administration Screens ............................ .......................................... ............................ ............................. ............................. ............................ ........................... ...................... ......... Simulation Status ........................... ......................................... ............................ ............................ ............................ ............................ ............................ ............................ ........................... ............. Class Summary Overview............................ .......................................... ............................ ............................. ............................. ............................ ........................... ...................... ......... Class SUmmary SImulation Summary...................................... .................................................... ............................ ............................ ........................... ...................... ......... Class summary best scores ............................ .......................................... ............................ ............................ ............................ ............................ ............................ .................... ...... simulation setup General Settings ........................... ......................................... ............................ ............................ ............................ ............................ ......................... ........... simulation setup Manage scenarios.................................. ................................................ ............................ ............................. ............................. ........................... ............... .. simualtion setup View users ........................... ......................................... ............................ ............................ ............................ ............................ ............................ .................... ...... Simulation setup intro videos ............................ .......................................... ............................ ............................ ............................ ............................ ............................ .................. .... Appen Ap pen di ces .......................... ........................................ ............................ ............................ ............................ ............................. ............................. ............................ ............................ ........................... ............... ..
Appendix A: Complementary Complementary Resources Resources............................ .......................................... ............................ ............................. ............................. ........................... ...................... ......... Appendix B: Goal Goal Solutions........................... ......................................... ............................ ............................. ............................. ............................ ............................ ........................... ............... .. Appendix C: Description Description of the Simulation Model Model .......................... ........................................ ............................ ............................ ............................ ......................... ........... Competitor and Customer Dynamics....................... ..................................... ............................ ............................. ............................. ............................ ........................... ............... .. Financials ........................... ......................................... ............................ ............................ ............................ ............................ ............................ ............................ ............................ ......................... ........... Appendix D: Release Release Notes .......................... ........................................ ............................ ............................. ............................. ............................ ............................ ........................... ............... ..
18 20 20 21 21 22 22 22 23 23 24 24 25 25 25 25 26 27 27 28 28 29 30 31
31 32 33 34 35 36
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[email protected] [email protected] or 617.783.7860.
Getti ng Started T E
This teaching note is designed for administrators of the Universal Rental Car Pricing Simulation (HBP Product 7005).
A C H I N
The Teaching Note section gives specific information related to the learning objectives and teaching opportunities inherent in the simulation.
G
The Technical Guide section reviews the process by which a faculty member adopts the simulation through the Harvard Business for Educators website and extends that access to students. T
N O E
The Simulation Overview section provides screenshots and description of user and administrative screens. Several Appendices provide information about the underpinnings of the simulation model, including an explanation of the hidden challenges and how points are distributed across team members. Teaching Note T E C H
Overview
N I C A
After giving an overview of the simulation and outlining some technical requirements, we review in detail the various tasks and challenges posed to the students. In doing so we provide details on the pedagogical concepts that each task allows covering and on the types of analyses and thought processes that students are expected to perform (using the tools and information available to them as part of the simulation) while attempting to respond to each task they are confronted with. We also discuss how to customize the tool, prepare for class and teach using the set of exercises that are part of the simulation. L G U I D E
This Facilitator’s Guide was last updated on July 15, 2014. For detailed release notes, see Release Notes. A P
Before Gettin g Started
P E N D
The Universal Rental Car Pricing Simulation works with both Windows and Mac operating systems. It is supported on the following browsers: Chrome, Firefox, Safari, IE 9+, and iPad devices. I C E S
To ensure an optimal Marketing Exercise experience, instructors should consider the following technical notes:
If running in a computer lab, make sure that the computers are operating with the minimum technical requirements. Check with your IT department for more information. If students will use their personal laptops, post the technical requirements and ask students to make sure their computers meet those requirements. If students will be accessing the internet via a wireless connection in class, check with your IT department to make sure that the classroom is properly configured for multiple students accessing the internet simultaneously.
Introduction The Universal Rental Car Pricing Simulation presents a realistic and engaging set of managerial pricing decisions in the Florida car rental market. In its most complete form, the simulation includes three regions—Orlando, Tampa, and Miami —which vary in size and customer mix. It involves two car rental companies—Universal and its primary competitor—with players asked to make decisions for Universal. The simulation lasts for 12 months, with players asked to make decisions each month. In particular,
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players must set weekday and weekend prices for each region for each period. Additionally, they are asked to make fleet size decisions (i.e., number of cars in their rental fleets) at several points throughout the simulation. T E A C
The general characteristics of the simulation, including the behaviors of the consumers and the competitor, have been drawn from the real-world experiences of one of the major car rental companies in the Florida market. As a result, the simulation can incorporate factors such as seasonality of demand, differing price sensitivities for business and leisure travelers, and realistic competitive responses to a player’s pricing decisions. Further, as would readily be available to managers of Universal, the simulation provides performance data for Universal (e.g., financial results, fleet utilization, etc.), as well as market research that sheds some light on its competitor’s performances. The net result is a true -to-life, but manageable, simulation that brings out the nuances of pricing in a competitive marketplace. At the Harvard Business School the simulation is used at the end of the pricing module in the first year required marketing course to illustrate the complexity of pricing in a dynamic context.
H
To allow instructors to tailor the simulation to different student abilities and/or different learning objectives, certain aspects of the simulation can be customized, as reflected in the Faculty Administration Simulation Setup Manage Scenarios section. These include the ability to (1) reduce the number of regions from three to either two or one, thereby allowing players to make more focused decisions, (2) customize the price sensitivity of the business and leisure travelers, (3) turn off seasonality, thereby making the impact of pricing decisions more transparent, (4) hold a player’s fleet size constant, thereby forcing players to optimize their prices given a fixed supply, (5) change the competitor’s pricing strategy to capture known pricing dynamics, and (6) alter the sector dynamics to capture either a growing, a flat, or a shrinking market.
T
I N G N O T E
E C H N I C A L G U I D E
Configuration Options This simulation has been designed for use across a wide range of undergraduate, graduate, and executive education courses, including marketing management, pricing, business strategy, game theory, and microeconomics. Toward this end, while instructors have the option and ability to fully customize the simulation to their needs, the simulation comes with three default settings, as follows: A P P E N D
Scenario A: Introductory Pricing Simulation—Intended for introductory and/or undergraduate courses, this scenario uses a single region (Orlando), constrains sales by regional capacity, and has seasonality turned off. The focus here is on the basics of pricing.
I C E S
Scenario B: Intermediate Pricing Simulation—Intended for more advanced undergraduate or early graduate level courses, this scenario adds a second region (Miami), constrains sales by regional capacity, and allows for changes in regional car rental capacity. This scenario adds richness to the simulation. Scenario C: Advanced Pricing Simulation—Intended for graduate and executive education courses in pricing, economics, or marketing management, this scenario employs all three regions (Orlando, Miami, and Tampa), constrains sales by regional capacity, allows for changes in car rental capacity, and includes seasonality of demand. This scenario fully captures the complexity of competitive pricing.
Across these settings, the simulation can be assigned and used in different ways to meet the specific pedagogical needs of the instructor. For example, the simulation can be assigned as a pre-class exercise, with students expected to play the simulation prior to class for some period of time (say, two hours). The subsequent class period could then be used to debrief the students’ experiences, highlighting those aspects of pricing the instructor desires. Alternatively, the simulation can be played over the course of a semester, with students expected to make decisions for one time period (a month) each week. Using this approach, it would be expected that students’ decision -making would become more sophisticated as the semester progressed. Finally, the simulation could be run multiple times, with the instructor increasing the
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complexity of the situation each time. Using this approach, the first run of the simulation might employ Scenario A, while later runs might entail using Scenarios B and C. T E
Finally, while this simulation can be used in isolation to highlight various aspects of pricing, it is strongly advised that it be used in conjunction with other educational materials. For instance, we anticipate that instructors may use this simulation as a capstone exercise, following a series of cases, lectures, and/or readings, to “bring pricing concepts and theory to life.” Appendix A: Complementary Resources offers some suggestions for what these other materials might be.
A C H I N G N O T E
Framing the Simulation for Students As with most simulations, there is the potential for the playing of the simulation to seem more interesting to students than any debrief that follows. There are several ways of avoiding this pitfall, however. T
First, it is recommended that instructors frame the playing of the simulation both as a learning experience and as a friendly competition between the students. In particular, given that students will be eager to find out how they performed relative to their colleagues, it is best to play into and feed off of this energy, through the handing out of small awards or prizes for the player that finishes the simulation with the highest net earnings. E C H N I C A
Second, it is recommended that the effort students put into simulation be commensurate with the emphasis placed on debriefing, and possibly grading, the simulation. As previously mentioned, one extreme might entail the playing of the simulation prior to class, over the course of about two hours, followed by a debrief of the simulation in a single class session. If this route is followed, there may be no need for grading or a write-up on the part of the students. Rather, the simulation may be used in much the same way as a case study. At the other extreme, an instructor may wish to use the simulation over the course of the semester and ask students to write a graded report about what they learned, what they tried to do, and what their results were.
L G U I D E
Finally and, perhaps, most important, experience suggests that it is helpful to establish some learning goals for students prior to the playing of the simulation. While an instructor may wish to highlight certain aspects of pricing using this simulation, some general questions that should prove useful include the following:
A
OVERALL STRATEGIC CONSIDERATIONS:
What pricing strategy did you use as you played the game? Did you change strategies or maintain the same strategy throughout? If you changed strategy, what caused you to do so?
P P E N D I C E S
In selecting the objective of your pricing strategy, what were you trying to maximize? (i.e., profit maximization, market share maximization, meet competition, status quo, etc.)
MARKET DEMAND: CUSTOMER PRICE RESPONSE FUNCTION:
What differences did you notice between weekday vs. weekend demand?
What is the weekend / weekday demand a proxy for?
How would you characterize the behavior of each type of customer’s (business/leisure) responses to changes in price? How did you use the observations you made regarding differences in these segments’ responses to price change in your pricing strategy?
Did you try to target a particular customer group? How were you able to target a specific group of customers through pricing?
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What differences did you identify between the various markets —Orlando, Miami, Tampa? T
E
Did you concentrate your analyses in any particular region? A
In what ways did those differences make the pricing decision more complicated?
C H I N
How did price sensitivity vary across regions? G N
How did you use the observations you made regarding the differences between these markets in your pricing strategy? O T E
COST STRUCTURE:
What general observations would you make about the economics of this business?
In what ways did you use the breakeven calculator?
How did an understanding of the general economics of the business affect your pricing decision?
T E C H
CAPACITY MANAGEMENT:
N I C
What did you do with capacity utilization? A
Was it harder to manage capacity surplus or capacity shortfall?
L G
Which was more important to manage —surplus or shortfall?
U I D
COMPETITIVE PRICE MOVES:
E
What did you think the competition was doing?
What kind of competitor were you up against? A
How intelligent was your competition? P P
IMPACT OF GENERAL MARKET CONDITIONS:
E
N
Did you observe any patterns in overall demand across the number of periods of the game that you played?
D I C E S
How would you characterize the elasticity of demand in t his market overall?
Was it a good year or a bad year to be managing this business? Why?
Learning Objectives and Teaching Opportunities Given the richness of this pricing simulation and the goals of the instructor, there are many principles of pricing that can be highlighted and explored in the simulation and in any debrief an instructor wishes to conduct. These include, but are not limited to: 1. Consumer sensitivity to price —the nature and dynamics of a consumer segment’s sensitivity to changes in price. 2. Heterogeneity of demand —accounting for demand differences across customer segments (i.e., business versus leisure customers), across regions that vary in size and customer mix, and across different days of the week and parts of the year. 3. The economics of pricing decisions—understanding the impact of a pricing decision on the financial results of the firm.
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[email protected] or 617.783.7860.
4. Inventory management —how to optimize one’s inventory through pricing, especially as it pertains to stockouts and excess inventory. T E A
5. Competitive response—the importance of understanding and accounting for the likely response of the competition to one’s pricing decisions. C H I N
6. General economic conditions—how background conditions, such as an expanding versus contracting market, influences decision making and perceptions of performance G N O
In the next few pages we address each of these principles as they are captured in the simulation. For instance, we assume that the basics of consumer price sensitivity are known to the instructor and, rather than provide an extensive tutorial on the topic, we explain how it is built into the simulation and what it means for students playing the simulation and for instructors debriefing the simulation. T
Debrief slides associated with this simulation are available from the Harvard Business for Educators website. You can search for them directly using product # 7011 or you can search for the simulation and will find the slides listed as an ancillary product to the simulation’s Teaching Note. These slides provide a board plan and teaching approach for the simulation debrief. The suggested debrief plan can be used in conjunction with asking students to respond to the questions posted on pages 5 & 6 of this guide. If you’d like these slides populated with data from your class, download them from the simulation using your administrative login. More details can be found in the Simulation Summary section of this guide.
E
T E C H N I C A
1. CONSUMER SENSITIVITY TO PRICE L G
A primary goal of this simulation is to highlight and understand customers’ sensitivity to changes in price. In pricing theory, this concept is often talked about as a “price elasticity,” typically defined as the percentage change in unit sales resulting from a given change in a product’s price. Mathematically, it is expressed as follows: U I D E
Price Elasticity = % Change in Unit Sales / % Change in Price with the usual price elasticity being negative, reflecting the fact that an increase in price most often leads to a decrease in unit sales. Price elasticities greater than –1.0 indicate that an increase in price results in a disproportionately large decrease in sales. Conversely, price elasticities less than –1.0 indicate that an increase in price leads to a disproportionately small decrease in unit sales. More generally, managers often talk about elastic demand, when the price elasticity is greater than -1.0, and inelastic demand, when the price elasticity is less than -1.0, both of which are captured in Figure TN-1. Figure TN-1:
A P P E N D I C E S
Elastic and Inelastic Demand Demand
Demand
Price
Price
Highly Elastic Demand
Highly Inelastic Demand
(small changes in price lead to big changes in demand)
(large changes in price lead to small changes in demand)
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In the real world, however, consumer sensitivity to price often is more complex than suggested in Figure TN-1. For instance, most consumers are not equally sensitive to price changes across all price points. A car rental customer, for example, might be relatively insensitive to a $5 price increase when rental prices are low (say, $25 per day), but may be highly sensitive to a $5 price increase when rental prices are high (say, $55 per day). Therefore, to realistically capture consumer price sensitivity in the rental car market, this simulation utilizes a profile of aggregate demand across price points, a general version of which is captured in Figure TN-2. As in the real world, this profile is not seen by the simulation player, but its general shape may be inferred by more astute students based on the results of their pricing decisions. T E A C H I N G N O T E
Figure TN-2:
A Prototypical Aggregate Demand Profile
Demand
100%
T E
75%
C H N
50%
I C A
25%
L G U
0% $0
$20
$40
$60
$80
I D
$100
E
In this profile, instructors should note several things. First, actual demand is expressed as a percentage of potential demand. For instance, 100% of the potential customers in this given period would rent a car if that car were priced at $20 per day (i. e., 100% of potential customers have a “willingness to pay” of at least $20). In contrast, only 25% of the potential customers would rent that very same car if were priced at $60 per day (i.e., 25% of potential customers have a “willingness to pay” of at least $60). Second, in this particular profile, it appears that customers’ “price elasticity” depends on the relative price point, with demand being insensitive to small changes in price at $15, relatively insensitive to changes in price at $30, and highly sensitive to changes in price at $55. A P P E N D I C E
Using profiles of this type, this simulation captures the price sensitivity of two distinct consumer segments—leisure customers and business customers. While an instructor has the ability to customize the demand profile for each of these segments, the default settings for these two segments (shown in Figure TN-3) have been chosen to capture the existing realities in the marketplace. Figure TN-3:
S
Default Settings of Price Sensitivities of Business and Leisure Customers
Leisure Demand
Business Demand
100%
100%
75%
75%
50%
50%
25%
25%
0%
0% $0
$20
$40
$60
$80
$100
$0
$20
$40
$60
$80
$100
These demand profiles capture several characteristics of leisure and business customers that are broadly generalizable. First, on average, leisure customers have a far lower willingness to pay than business
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customers, perhaps due to leisure customers having to pay out of their own pockets, while business customers often get reimbursed for their expenses. As a result, leisure customers may be far more likely to shop around to obtain the best price or to decide not to rent altogether, while business customers may be more concerned with factors such as location of the rental lot, quality and speed of service, loyalty programs, and availability of cars. Second, it appears that the leisure customers are sensitive to changes in price across the range of possible prices, while the business customers are relatively insensitive to changes in price at prices points below $40, but much more sensitive to changes in price above $60. Finally, it appears that both leisure and business customers have an upper limit to their willingness to pay (i.e., no one is willing to pay more than $100 per day). T E A C H I N G N O T
As operationalized in the simulation, the impact of these pricing profiles on total and relative demand is captured in a two-step process, as captured in Appendix B. For illustrative purposes, consider how the simulation first determines the size of the leisure market in Orlando on a weekday in July and then allocates that market between Universal and its competitor. For this example, assume that, for weekdays in July in Orlando, the competitor set its prices at $40 per car and Universal sets its at $50 per car. 1 Finally, assume that the potential size of the leisure market in Orlando for weekdays in July is 100,000 rental days.
E
1.
2.
3.
T E C
Step One assesses the size of the market based on the prices charged by the two competitors. Based on the demand profile in Figure TN-3, 55% of leisure customers have a willingness to pay of at least $50, implying a demand of 55,000 rental days (i.e., 55% of 100,000 rental days) at this price point. Second, 15% (i.e., 70% – 55%) of leisure customers have a willingness to pay of at least $40, but less than $50 per day, implying a demand of 15,000 rental days between these two price points. Finally, approximately 30% of leisure customers are not willing to pay $40 per day, meaning 30,000 potential customers are out of the market at the current prices. As a result, the total market demand is 70,000 (55,000+15,000) rental days given the current prices.
H N I C A L G U I D
Step Two then allocates this demand across the two competitors. First, given the above information, the simulation allocates to the competitor all of those 15,000 leisure customers who are willing to pay at least $40, but less than $50 per day. Second, the simulation evenly splits those 55,000 customers who are willing to pay at least $50 per day between the competitor and Universal. 2
E
As a result, the competitor captures 42,500 rental days [100% of 15,000 rental days + 50% of 55,000 rental days], while Universal captures 27,500 rental days [50% of 55,000 rental days].
A P P E N D I C E S
Thus, in this example, total leisure demand for this period in Orlando would be 70,000 rental days, with the competitor garnering a 61% market share (i.e., 42,500 ÷ 70,000) and Universal garnering a 39% market share. While these inner workings of the simulation will be hidden to the student, their practical implications should be apparent. In particular, as students work through the simulation, several aspects of pricing’s impact on demand should become evident, each of which may be explored in any debrief. These include:
The existence of two market segments with very different reactions to price. At a minimum, students should recognize that business and leisure customers react differently to absolute levels of price and changes in price, with leisure customers significantly more price sensitive.
1
Note that neither Universal nor its competitor has the ability to set prices differentially for the business and leisure customer. Therefore, the $50 per-day price that Universal has set applies to both sets of customers. 2
We have chosen a 50% allocation in the $40 to $50 price range to reflect the following consumer behavior: Assume a customer wishing to rent a car randomly calls one of the two rental companies. Customers enter a rental contract if the quoted price is below their willingness to pay. Therefore, those who have a willingness to pay of, say, $60 per day are equally likely to rent with Universal or the competitor.
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Note that potential reasons behind these different price sensitivities are useful to explore in any simulation debrief.
T E
The impact of these price sensitivities on total demand. More perceptive students should also recognize that total demand in each market is impacted by the pricing decisions of Universal and its competitor. In particular, while pricing may impact a consumer’s decision about who to rent from, it also impacts the decision of whether to rent at all. Thus, overall demand in the marketplace will be higher when the prices of the two competitors are relatively low as opposed to relatively high.
A C H I N G N O T
The impact of these price sensitivities on relative market share. Finally, more perceptive students may recognize that the market share of Universal relative to its competitor may fluctuate more radically given the very same change in price in regions where leisure travelers outnumber business travelers than in regions where business travelers outnumber leisure travelers.
E
T
2. HETEROGENEITY OF DEMAND ACROSS CUSTOMERS, MARKETS, AND TIME
E C
While a customer’s price sensitivity is conceptually important, its impact in the sim ulation is felt due to the heterogeneity across customers, markets, and time that have been built into the simulation.
H N I C
Customer Heterogeneity
A L G
The first level of heterogeneity, which has already been partially discussed, involves customers. In the simulation, we have two types of customers —business and leisure —that vary on at least two key dimensions:
U I D E
Business Customers — They tend to be less price sensitive and they tend to rent cars during the week (90% of their rentals) as opposed to the weekend (10% of their rentals). Leisure Customers — They tend to be more price sensitive and they tend to rent cars both during the week (65% of their rentals) and on the weekends (35% of their rentals). A P P
Market Heterogeneity E N
The second level of heterogeneity is regional. We have purposefully chosen three Florida markets that vary in their size and customer mix. These three markets are:
3
Orlando — the largest car rental market in Florida, with approximately 1.2 million rental days per month.3 In addition, owing to the presence of eight theme parks, including Sea World, Disney, and Universal Studios, approximately 53% of these car rentals are to leisure customers, with the remaining 47% going to business customers.
D I C E S
Miami — the second-largest market in Florida, with approximately 700,000 rental days per month. In addition, with 60% of all U.S. trade with Central America flowing through Miami and with Miami-Dade county having the largest concentration of banks south of New York City, we have modeled the market in Miami as comprised of approximately 78% business customers. Only 22% are leisure customers. Tampa — the smallest of the three Florida markets in the simulation, with approximately 200,000 rental days per month, Tampa has almost two business customers for every one leisure customer (64% business to 36% leisure). With some leisure attractions, such as Busch Gardens, it attracts a healthy leisure crowd, but it also supports a thriving business community.
A rental day is one car rented for one day. If a person rents a car for an entire week, that represents several rental days.
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It should be noted that these three markets have b een chosen to represent relatively distinct and separate car rental markets. While students may wish to adopt a common pricing strategy across the three markets, there is no requirement for them to do so. In addition, the three markets are geographically dispersed, eliminating the ability to shift inventory from one market to another in response to stockouts or excess inventory. T E A C H I N G
Temporal Heterogeneity N
The third level of heterogeneity is temporal, which comes in two forms. The first is difference in demand across days of the week — modeled as weekday versus weekend demand. The second is seasonality, with demand fluctuating based on the time of the year.
O
T
Weekday versus weekend — As is the case with many travel-related businesses, total demand for rental cars is typically higher on weekdays than weekends, with the bulk of the business customers and many of the leisure customers looking to rent during the week, but principally the leisure customers looking to rent on the weekends. Note, however, that actual demand for vehicles in a given market will depend upon the customer mix in that market and the prices charged for weekday versus weekend rentals.
E
T E C H N
I
Seasonality — Given that Florida attracts a very large number of leisure customers who strongly favor certain times of the year over others, there also is seasonality inherent in the potential demand, as shown in Figure TN-4. Again, however, the observed seasonality will vary by market, with the seasonality more pronounced for the markets with a greater percentage of leisure customers. C A L G U I D E
Figure TN-4:
Seasonality of Demand in the Simulation Seasonality
1.10 d n a m e D l a m r o N = 0 0 . 1
A P
1.05
P
1.00
E
0.95
D
N I C
0.90
E S
0.85 0.80 Oct
Nov D ec
Jan Feb
Mar
Business
Apr
May Jun
Jul
Aug Sep
Leisure
The Net Effect Custom er Mix, Market, and Time
While these three types of heterogeneity create a seemingly complex set of permutations, in the real world and in our simulation they tend to lead to several generalizations that the perceptive students should pick up upon as they work their way through the simulation. These are best captured at the level of the market:
Dynamics in Orlando — The Orlando market is largely governed by the behavior of the leisure customer. As such, it is a relatively price-sensitive market, with weekday demand versus weekend demand more stable than in the other two markets. Additionally, with its high percentage of leisure customers, it is the market most affected by seasonality. Finally, due to its size and its associated economies of scale, it is the market that can have the greatest impact on Universal’s economics and financial performance. As students have said, “Make sure you get Orlando right.”
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Dynamics in Miami — The Miami market is highly governed by the behavior of the business customer, making it less price sensitive during the weekday period. However, given the disproportionate number of business customers, Miami also is the market most prone to a wide variance between weekday and weekend demand. As a result, the importance of inventory management may be most pronounced in this market. Finally, given its reliance on the business customer, the Miami market is the market least affected by seasonality. T E A C H I N G
Dynamics in Tampa — In some ways, Tampa may represent the toughest challenge for students. It is small and it is has a significant percentage of both leisure and business customers, requiring students to understand and accommodate both groups. However, it can also be a profitable market given its favorable cost structure.
N O T E
3. THE ECONOMICS OF PRICING DECISIONS
A key issue in any pricing exercise regards the financial impact of one’s pricing decisions. For instance, while understanding the price sensitivities of your customer segments allows one to anticipate the sales impact of a price change, the financial impact of that change requires a deeper understanding of the economics of the business. In particular, an important learning point throughout this exercise is the impact of fixed costs on the profitability of a region. T E C H N
As in almost any business, there are fixe d costs associated with running each one of Universal’s three regions. While the sources of these fixed costs are not explicitly identified, one can surmise that they include the cost of the land and buildings (e.g., long-term lease payments), the maintenance of the land and buildings, the cost of security, the salaries of management and support staff, insurance, and so forth.
C
There are several characteristics of these costs that are important for the playing of the simulation. First, as the name implie s, they are “fixed”— they are fully incurred regardless of whether a given region rents all of its cars or only a fraction of its cars. In fact, in this simulation, even if one wanted to shut down operations in a given region, these costs would still be incurred. E
I
Second, there are economies of scale associated with these fixed costs. Driving these economies of scale is the fact that expenses like insurance, security, management, support staff, and building maintenance typically do not double with a doubling of the fleet size. Rather, while they increase, they increase at a lower rate. Thus, a region with a large rental car fleet will generally have a lower fixed cost, on a per-car basis, than will a region with a smaller rental car fleet. For example, i n this simulation, while Universal’s Orlando rental fleet is nearly double Miami’s rental fleet, the fixed cost of running the Orlando operation is only one and a half times as large as the fixed cost of running Miami’s. Tampa’s fixed costs are significantly lower than the other two regions not only because of its smaller fleet size but also because the overall fixed costs associated with running the rental car operation in Tampa are significantly lower. This is a function of cheaper real estate prices, lower wages, and the lower overall cost of running a business in the Tampa area. For this reason, fixed costs per car are actually lowest in Tampa in spite of its much smaller fleet size. Some of the fixed costs are also assumed to be step-function fixed costs and Tampa is assumed to be closer to the upper fleet size threshold limit for its current fixed cost structure than either Miami or Orlando. In greater detail, the approximate fleet sizes and fixed costs for each of the three regions are as follows:
A L G U I D
A P P E N D I C E S
Fixed Costs (per month) Region
Rental Cars
Aggregate
Per Car
Orlando
21,617 cars
$ 7,426,105
$ 344 per car
Miami
12,807 cars
$ 4,930,116
$ 385 per car
Tampa
4,087 cars
$ 1,251,207
$ 306 per car
The impacts of these fixed costs are several. First, holding all else constant, it is much harder to be profitable in Miami than it is in Orlando. More astute students should recognize that this is largely due
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to the cost structure of the business in Miami, while weaker students might attribute it wholly to other factors (e.g., competition). T E A
Second, given that the fixed costs are spread over a smaller number of cars in Miami than in Orlando, the same sized decrease in rentals will have a bigger impact on the bottom line in Miami. For instance, the fixed cost per rented vehicle will increase from $344 to $360 in Orlando if rentals drop 1,000 units per month—from 21,617 to 20,617 cars. However, given that same size drop in units, the fixed cost per rented car will increase from $385. to $417 per car in Miami. The impact of a 20% drop in units (in Tampa has about the same impact on the fixed cost per rented vehicle as the same percentage drop in Miami in spite of the fact that Tampa has about a quarter of the fleet size of Miami. Again, this is due to a much lower overall fixed cost of doing business in Tampa. C H I N G N O T
Finally, decisions to change fleet size will have a very similar impact. In particular, given that fixed costs rarely change with short-term changes to capacity (i.e., fleet size), a decision to lower fleet size by 1,000 units will have a much different impact to the economics of the business in Orlando than in Miami or Tampa. Therefore, a fleet capacity decision that may make sense for City A may not be a good decision for City B.
E
T E
In turn, the simulation allows students to explore the impact of these economic differences in at least two ways:
C
H N I
Through trial and error — Through their repeated pricing decisions, students should learn the very same decision in one market can have a different economic impact than in another market.
C A L G
U
Through financial reports — By studying Universal’s financial reports, students can proactively anticipate the differential impact of decisions across the three markets. I D E
4. THE ROLE OF INVENTORY MANAGEMENT
Hand in hand with most pricing decisions are decisions around inventory management. In the case of a fixed inventory of rental cars, for instance, a manager would like to price so as to match demand to a stable supply, thereby avoiding missed revenues (in the form of stockouts) or idle assets (in the form of unrented cars). Given the ability to increase or decrease inventory, however, adds another dimension to a firm’s pricing decisions. In particular, adding the ability to periodically adjust the fleet size enables players to choose between adjusting prices and/or adjusting fleet size to deal with imbalances between supply and demand. With this in mind, participants face a fixed fleet size in the simplest of the simulation settings —Scenario A—but are allowed to increase or reduce fleet sizes at strategic points in the more complex settings — Scenarios B and C. Instructors can do this by selecting the “Allow Capacity Changes Every Three Months” option under Scenario Setup.
A P P E N D I C E S
Fixed Inventory
As the default in Scenario A, or based on the choice of the instructor, in the fixed inventory setting students are provided a fixed inventory of rental cars for each of the regions for the duration of the game. It is up to the players to manage price so as to optimally employ the existing fleet both during the week and on the weekends. In particular, players should pay special attention to the “Capacity Utilization” portion of the simulation’s dashboard, which captures the surplus inventory and the shortfall in the previous month. Surplus (or excess) inventory is the cumulative number of days that all of Universal’s cars went unrented in the previous month. In contrast, shortfall (or stockouts) represents the cumulative number of cars that at Universal could have been rented, but where none was available. 4
4
For instance, if 10 cars went unrented for 15 days each, this would amount to 150 days of surplus. Similarly, if demand exceeded supply by 20 cars for 5 days, this would amount to 100 days of shortfall.
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An interesting phenomenon that students may struggle with, and which is an important learning point, is the fact that Universal can experience both a significant surplus (unrented cars) and a significant shortfall (too few cars) in a given month. In a region dominated by one type of customers, such as Miami with its strong business customer focus, it is highly likely that Universal will experience a shortfall during the week, but a significant surplus on the weekends. Indeed, it will test a student’s pricing skills to optimally employ Universal’s fixed fleet of cars both during the week and on the weekend in such a region. T E A C H I N G
Ad ju stab le Inv ent or y
N O
In Scenarios B and C, to add realism to the simulation, students are given the ability to increase or decrease their fleet size in each region at three points during the simulation—i.e., at the end of the third, sixth, and ninth months. A reduction in fleet size reduces vehicle inventory costs on the income statement.
T
Adding the ability to increase or decrease Universal’s fleet size brings another degree of freedom (and, with it, more complexity) to players’ pricing decisions. As mentioned, for instance, they can now choose to adjust price and/or adjust capacity to deal with imbalances between supply and demand. In this regard, they must take into account many factors, such as industry growth (is the market growing, flat, shrinking), seasonality (are we entering a slow period), the marginal revenue of one more car (how much will it bring in versus how much will it cost), and whether adjusting price is a better tool than adjusting fleet size to manage demand.
E
T E C H N I C
Regardless of whether students face a fixed fleet size or are allowed to adjust their fleet size during the simulation, the challenge for students will be to optimally utilize the available cars. In particular, to minimize both capacity surpluses and capacity shortfalls, students must fully understand the changes in underlying demand across regions and across time and understand how pricing can be used to match actual demand to existing supply.
A L G U I D E
Useful questions to bring out some of these issues include, “What was harder to manage— capacity surplus or capacity shortfall?” and “What was more important to manage?” In the end, both are extremely important to manage if a manager wishes to maximize his or her financial performance. A
5. COMPETITIVE RESPONSE
P
Critical to any set of pricing decisions in the real world is competitive response. Indeed, the question of “What will my competitor do if I do X?” is at the heart of many management debates. While it is impossible to capture all of the pricing strategies a competitor might employ, we have incorporated four into the simulation that we feel captures a range of realistic strategies. In keeping with the 12 one-month periods in the simulation, these strategies are not delayed, meaning that our competitor responds in Period N+1 to what has happened in Period N . These four strategies are:
P E N D I C E S
Managing capacity with price (capacity utilization strategy) — The default setting for this simulation has the competitor using an inward-looking pricing strategy. In a capacity utilization strategy, the competitor adjusts its price in Period N+1 based on its own fleet utilization in Period N , with a target utilization of approximately 90%. For instance, if the competitor experiences chronic weekday stockouts in Orlando in Period N , it will raise weekday prices in Orlando in Period N+1 to extract more profits from its limited capacity. And, the larger the stockout in Period N , the larger the upward adjustment of price in Period N+1. Similarly, if it finds it has large excess weekend inventory in Tampa in Period N , it will lower its weekend rental price in Tampa in Period N+1 to stimulate demand.
It should be noted that this “capacity utilization” strategy is not purely “inward looking,” as Universal’s pricing decisions in Period N affect the competitor’s demand in Period N . For instance, if Universal raises its weekday prices in Orlando in Period N , the competitor’s offerings become relatively more attractive and their demand in Period N should increase, possibly beyond th eir capacity, leading to stockouts. Therefore, Universal’s raising of price in Period N may lead the competitor to raise prices in Period N+1. Similarly, Universal’s lowering price in Period N may lead the competitor to lower prices in Period N+1.
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Tit-for-Tat strategy — A second customization option is an outward- looking “tit for tat” strategy, in which the competitor matches its prices in Period N+1 to Universal’s prices in Period N . Therefore, if Universal were to set its weekend price in Miami to $40 in Period N , the competitor would set its weekend price in Miami to $40 in Period N+1. T E A C H I N
We have included this “tit for tat” strategy as an option for several reasons. First, tit -for-tat plays a central role in many game theoretic models of optimal competitive response, providing a useful real-world demonstration of this theoretically interesting topic. Second, if a player seeks to be the low-priced provider in a particular market, the tit- for-tat strategy presents the distinct possibility of a downward pricing spiral. Conversely, if a player recognizes the competitor’s general strategy, tit -for-tat can lead to substantially higher gains for both Universal and the competitor. In either case, it highlights the need to be sensitive to the competitor’ s actions.
G N O T
Predatory pricing strategy — A third customization option is a strategy of predatory pricing behavior by the competitor. In this strategy the competitor establishes both its weekday and weekend prices at 10% below Universal’s prices or 10% abov e variable costs plus vehicle inventory costs—whichever is higher. Using this strategy, the competitor will usually be priced around 10% below Universal unless Universal's prices are very low. This option may be of interest to faculty who want to explore competitive dynamics involving a situation in which a well-capitalized competitor chooses to pursue an “expensive” pricing strategy to establish or re-establish a market share leadership position. Although theoretically convincing, these negative sum pricing games often have significant detrimental consequences for both competitors in the medium and longer t erm and many industries have been structurally damaged by this kind of destructive price competition.
E
T E C H N I C A L G U I D
Gradually increases price strategy — In this option, the competitor gradually and consistently increases price. One pedagogical reason for including this strategy is to assess whether students correctly interpret a competitor’s pricing strategy. Indeed, experience suggests that students often give a competitor credit for complex and well thought-out pricing strategies when, in fact, the competitor’s pricing strategy is often very simplistic in nature or even random.
E
A P P E N D
Across these four options for competitive response, the learning point we have tried to incorporate into this simulation is the competitive nature of pricing decisions. In particular, just as players will be influenced by how the competition prices in a given period, so the competitor will likely be influenced by Universal’s prices in a given period. The better a player’s understanding of how the competition might respond, the better the player’s pricing decisions should be. I C E S
In any debrief, it is highly likely that students will want to talk about what their competitors were doing. One way to draw this out is to ask, “What kind of competitor were you up against?” or “How intelligent was your competition?” Two sets of responses to these questions are particularly worth exploring. The first set includes responses that the competitor was not smart (e.g., “All they did was drive prices down!”). The second set includes responses that the competitor was particularly smart (e.g., “They always seemed one step ahead!”). In either case, it is important to note that the competitor’s actions were lar gely either random (in the constant pricing strategy) or reactive (in the capacity utilization and the tit-for-tat strategy), suggesting that the competitor might not have been either as dumb or as smart as students gave it credit for. 6. GENERAL ECONOMIC CONDITIONS
Finally, a factor that instructors may wish to customize to their needs and t hat students should (but, often, will not) pick up on involves the general economic conditions surrounding the game. In particular, while the default condition for the simulation is a stable market size, an instructor can opt to have the Florida market increasing or decreasing in size. Specifically, here are three background conditions:
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Increasing Market — In the most forgiving market conditions, the overall car rental market is increasing by 2% per month over the course of the 12 periods. If students do not recognize this growth, they may feel they are doing better than they actually are. T E A C
Flat Market — In this default condition, the market size is relatively stable, with any increases or decreases in Universal’s performance largely due to the player’s own actions.
H
Decreasing Market — In the toughest market conditions, the overall car rental market is decreasing by 2% per month over the course of the 12 periods. In this case, if students do not recognize this market contraction, they may feel they are doing worse than they actually are.
N
I N G O T E
While students are not explicitly told that the market is either increasing, flat, or decreasing, their own performance combined with that of their competitor should be quite telling in this regard. However, experience suggests that many students will not pick up on this dimension, thereby giving themselves too much credit when the market is expanding or too little credit when the market is decreasing. To raise this issue during any debrief, an instructor may wish to ask students something to the effect of, “Was it a good year or a bad year to be in the rental car market in Florida?” Better students should be able to talk about what the market was doing, independent of their pricing decisions. Further, better students should have incorporated these market conditions into their pricing and fleet management decisions (e.g., reducing fleet size in a shrinking market, expanding fleet size in a growing market).
T E C H N I C A
By way of caution, it should be noted that the existence of seasonality in the simulation may partially mask an increasing or decreasing market. Therefore, for all but the most advanced of participants, it is recommended that seasonality and a changing market size not be used simultaneously
L G U I D E
A P P E N D I C E S
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Technical Guide T E A C
Adopti ng t he Sim ulati on and En abli ng St udent A ccess H I N G
The Harvard Business Publishing for Educators web site allows you to distribute course materials — including simulations —to students through online coursepacks. Detailed instructions on creating and managing coursepacks can be found on our site help page: http://hbsp.harvard.edu/list/site-help. N O T E
STEP 1: ADD Ad d t he s imul ati on to a co ur sep ack alo ng wi th ot her HBP mat eri als .
Search for the simulation on the Harvard Business Publishing for Educators web site http://hbsp.harvard.edu and add to new or existing coursepack. T E C H
STEP 2: ACTIVATE N I
Ac ti vat e yo ur co ur sep ack to gai n ac ces s t o t he s imul ati on as a faci li tat or . C A
During the activation process you can determine payment mode (Student-pay or Institution-pay) and set course information (course level, etc.)
L
The activation process produces a unique coursepack link you can email to students or post so they can access—and purchase, if using Student-pay mode—the simulation
I
G U D E
The activation process also provides a ‘Manage Simulation’ link that grants access to the simulation as a facilitator
STEP 3: DISTRIBUTE A P
Distribute the coursepack link to students so t hey can enroll 5 P E
N
When students go to the coursepack link, they will reach a login screen to the Harvard Business Publishing for Educators web site (if students have an existing account they can use it to login; otherwise they can complete a brief registration to create an account)
Student-pay: After logging in, students pay for the materials in the coursepack
Institution-pay: After logging in, students will be automatically enrolled in the coursepack
D I C E S
Once enrolled in the coursepack, students automatically appear in the simulation awaiting a scenario assignment
If students click on “Run Simulation” in their coursepack prior to the simulation being set to open, users will see the message: "The simulation is closed by the facilitator."
STEP 4: CONFIGURE Configure the simulation for your c lass
Click on “Manage Simulation” from your coursepack view Go to “Manage Scenarios” to create and assign scenarios. The simulation will be set to Scenario
A by default.
5 Contact HBP Customer Service at (800) 810-8858 (+1 617-783-7700 outside U.S. and Canada) or
[email protected] if
you require bulk-registration of students in your coursepack
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Click on “Edit Scenario” to activate the items on the right – you can change any of the
default settings in that scenario, including the scenario name and description for
T
students, as well as the run limit. Click on “Activate Scenario” to save your changes. A
E
Click on “Run Scenario” to play that scenario as a student. Note that your performance
C H I
will not be tracked with the class results.
N
Click on “Revert to Original Settings” if you want to go back to the default settings for that
G
scenario.
N
O
If you’d like to use an alternative scenario, click on “Activate Scenario” under the desired
T E
new scenario.
Go to “General Settings” to configure settings for the simulation (regardless of scenario)
The simulation is “closed” by default; leave the simulation “closed” if you prefer to assign the materials on the “Prepare Tab” prior to running the simulation.
When ready to play, select the “open” radio button
E
Other setup options on this screen:
H
T
C N I C
Whether or not students can see the “high scores” list from other users in the class A L
Whether or not you want to restrict students to a certain month (in order to control their pace through the simulation) G U I
Be sure to click “Save Settings” to save your changes D E
Detailed instructions on how to use these screens are provided on the “Intro Videos” screen and the “Simulation Overview” sections of this guide.
Help Resour ces A
Tips to Optimize Computer Performance during a Simulation
P
1. 2. 3. 4.
Restart your computer. Computers that have not been restarted in a long time get slow. A restart will help your computer’s speed and your overall simulation performance. ONE browser + ONE tab. Simulations work best with only one browser and one tab open. Opening the
P
simulation in more than one bro wser or tab will negatively impact performance and impact your data. Close all other pr ograms and browsers. Running fewer programs will allow your computer to devote more speed to the simulation. Turn off other wireless devices. Multiple devices simultaneously trying to access the wireless at the same time can weaken the network strength. You may also have devices that are holding on to connections from other distant locations. Shut off the wireless on all your devices and turn it back on for the device you will be using for the simulation.
E N D I C E S
For technical and account support, contact Harvard Business Publishing Customer Support: Web
http://hbsp.harvard.edu/list/contact-us
Phone
1-800-810-8858 (+1 617-783-7700 outside U.S. and Canada)
Fax
+1-617-783-7666
E-mail
[email protected]
Computer Technical Requirements
Please visit our website for the latest technical requirements: http://hbsp.harvard.edu/list/tech-specs
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Simulation Overview T E
USER SCREENS A C H I N
The basic architecture of the player screens includes a Prepare section with introductory materials and an Analyze section with simulation data. Decisions are made in the right-hand panel which is always visible when viewing the Analyze section G N O T E
Prepare The player defaults to this screen the first time he or she enters the simulation. It provides basic information on how to navigate and use the interface. You can restrict access to this screen if you’d like to assign the Prepare materials ahead of time. See the Faculty Admini stratio n Simulation Setup General Settings screen for more information.
The Prepare section includes:
How to Play features, which
T E
user information about how to with the simulation. In addition to instructions, users can watch a capture video about “How to
Play”, or
download a PDF that outlines to play. You have access to the as a PPT presentation through administrative screens, in case to customize it for your class. The Scenario Panel, which basic overview of the simulation for the user. Depending on the configuration you assigned on
the steps same PDF the G
you’d like E
C
provide the engage on-screen screen-
Faculty Administration Simulation Setup Manage
H N I C A L U I D
gives a scenario the A P
Scenario P
screens, students will set weekday and weekend prices for your rental car inventory in one, two, or three cities in the Florida region. E N D I C E S
An aly ze
Dashb oar d Ov erv iew
This is the Overview status screen for the simulation. Elements of this screen include:
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Market Share – These pie charts show the percent market share for both Universal and its Competitor in each city, T
as well as in the Florida region overall. For more information, see the Market Demand tab. E A
Unit Sales – These line graphs track the monthly unit sales for both weekday and weekend prices in each city and C H
the Florida region. For more information, see the Unit Sales tab. I N
Capacity Utilization – These bar charts display the capacity utilization percentage by weekday and weekend in
G N
each city and the Florida region. For more information, see the Capacity Utilization tab. O T
E
Fleet Size – These charts track weekday and weekend fleet size in each city and the region. For more information,
see the Fleet Size tab.
An aly ze
Pri ce His to ry T
The Price History screen provides pricing data for each of Universal city markets and the Competitor. Information is viewable in either graphs or tables:
An aly ze
E C H
View Graphs shows weekday and weekend
I
prices for both Universal and Competitor.
A
View Data lists the price history in tables which G
can be copied to your computer clipboard and then pasted into your spreadsheet program o f choice.
U
N C L
I D
Mark et Demand
E
A P P
The Market Demand screen provides market demand data for each city market and the Florida region. Information is viewable in either graphs or tables: E N D I
View Graphs option shows two different types of
charts: o
o
C E S
Market Demand line graphs tracks each city’s monthly market demand and
forecasted demand in each territory. Market Share percent market share for both Universal and its Competitor in each territory.
View Data shows demand, total sales, and unfilled
orders. This data can be copied to your computer clipboard and then pasted into your spreadsheet program of choice. Note that each region has slight differences apart from price sensitivity that drive market share. These include attributes such as proximity of the rental office to the airport, better brand recognition, etc. Thus the competition has greater market share than Universal in some regions, though not all.
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An aly ze
Uni t Sal es T E A C
Unit Sales tracks sales for both Universal and the
H I N
Competitor mapped against the price in each month.
View Graphs shows: Monthly Sales tracks sales figures for each o
N
city and Florida region. Price History tracks weekday and weekend pricing for Universal and its Competitor in each city. E
G
o
O T
View Data shows the sales numbers in a table. Data can be copied to your computer’s clipboard. T E C H N
An aly ze
I C
Fleet Size A
The Fleet Size screens track Universal’s fleet size, weekday and weekend orders in each territory.
L
G U I D
View Graphs shows a bar graph tracking Universal’s
fleet size, weekday, and weekend orders
E
View Data shows Universal’s fleet size and order report in a table. Data can be copied to your computer’s
clipboard. A
Note that if you’ve enabled changes to fleet size in the
P P E
scenario, students can re-allocate among the 3 markets or reduce the statewide fleet size, but they cannot expand their overall capacity. N D I C E S
An aly ze
Capacity Utilization The Capacity Utilization screen includes:
View Graphs The % Capacity Needed Bar Chart (note o
o
that if orders exceed inventory, this will not go beyond 100% on the player screens. It will however be tracked on the faculty screens, since noting unavailable capacity is useful in assessing performance). The Monthly Orders Graph
View Data
o
The Utilization Data History Table (which can be copied to your computer clipboard and then pasted into your spreadsheet program of choice, most typically Excel.)
Note that a vehicle can only be rented once per day.
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An aly ze
Mark et Researc h T E A
This Market Research screen allows users to:
C H I
View Graphs Market Size shows the Business vs. Leisure o
N
o
G
for the selected Region). Market Share shows Universal vs. Competitor market share for the selected Region).
N O T E
View Data Market Share Report (which can be copied o
to your computer clipboard and then pasted into your spreadsheet program of choice, most typically Excel.)
T E C
View Competitor Statement
Competitor Income Statement for the current month,
N
which can also be copied to clipboard. C
H I A L
An aly ze
Net Inc om e
G U I
The Net Income screen includes Monthly Net Income Reports for each city and region for the most recent three months, viewable as Totals , Per Vehicle Per Mont h , Per Rented Vehicl e, or Percentages format. Note the complete income history can be copied to your computer’s clipboard and then pasted to your spreadsheet program.
D
A P P E
Variable Costs are calculated as (unit
variable costs) x (sales). These costs include variable costs such as costs associated with washing the cars, conducting rental agreements, etc.
E
N D I C E S
Vehicle Inventor y Costs are related to the
vehicle inventory (vehicles can be moved between regions and the total number of vehicles can be reduced). These costs go up when additional cars are required.
Allo cated Fixed Costs are plant, property, and equipment (excluding vehicles) and are allocated based on sales. Weighted Average Profit Contribution is calculated by subtracting the variable cost per vehicle from the average monthly
revenue per vehicle.
Net Profit Contribution is calculated per vehicle across both weekdays and weekends. See Anal yze Br eakeven Calculator for an explanation of how this Profit Contribution is incorporated into the breakeven—or “Profit Enhancement”—analysis.
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An aly ze
Br eakev en Calc ul ato r T E A
The Breakeven Calculator helps facilitate the analysis of price changes and can be customized for Weekday or Weekend pricing and for each region. H I N G
The default price is shown in the middle of the Horizontal Price Range. Sliding the Price Indicator left or right along the Horizontal Price Range operates the calculator by setting the Price Change (the difference between the default price and the Price Indicator).
C
N O T E
The Breakeven Change in Volume formula is displayed using the actual values based on the Price Change denoted above. This value illustrates the change in unit sales resulting from a change in price that keeps total contribution constant. T E C
H
The Contribution Margin is derived from the portion of the weighted average profit contribution that can be attributed to weekend and weekday rentals. The profit contribution per vehicle is calculated by subtracting the variable cost per vehicle from the average monthly revenue per vehicle. Some portion of this profit contribution comes from weekend rentals and some from weekday rentals. The fraction of the weighted average profit contribution per vehicle attributable to weekend and weekday rentals is used in the breakeven calculator. The breakeven calculator is meant to demonstrate for students, for example, that a decrease in price necessitates a large
N I C A L G U I D
increase in volume in order to “breakeven” (in this case, breakeven refers to making the same level of profit incurred at the original price point). Unless demand is highly elastic, it’s difficult to increase volume by the percentages necessary (i.e., a price
E
change of only $2 requires an increase of 9-10% in volume). In other words, if the change in sales (unit or dollar) exceeds the amount necessary to breakeven, the price change was profitable. The corollary is that if the change in sales falls short of the amount necessary to breakeven, the price change was unprofitable. A P P E N
Decisions Panel D I
Decisions for the upcoming month are entered in the right panel.
C E S
Price entry options are based on the configuration set by the administrator (see Faculty Administration General Setting s ). Once prices are entered, the Advance to Next Mo nt h button will submit the prices and advance the simulation to the next round and update the month indicator below.
Please note that when “Allow Capacity Changes Every Three Months” is enabled on the Faculty Administration General Setting s screen, then on months January,
May, and September the user will be presented with the additional requirement of re-allocating capacity between Regions as depicted below.
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Decide
Post Your Strategy T E A C H I
This screen appears only once, after the final price decisions are entered for the final month of play. It displays the Final Performance Metrics and asks the player to enter a short Strategy Title and Strategy Description , both of which are then displayed on the High Scores N G N O T E
screen. Note that you can choose to hide “High Scores” by General Settings going to the Faculty Admin istratio n
screen.
T E C H N I C A
Ar ch iv ed Run s L G U I D E
A P P
The Arc hi ved Ru ns screen is available at any time from a link at the bottom of the screen. This pop-up screen confirms the Scenario Setup screen) and provides status on, and access to, current scenario (as set on the Faculty Admin istrati on prior runs of the simulation. E N D I C E S
Faculty Administr ation Screens The basic architecture of the faculty administration section includes a Class Summary section, which provides aggregate data for the entire class, and a Simulation Setup section, which allows you to configure some basic options for how the simulation will be used for your class. Most screens include a Copy to Clipboard tool. Clicking this will duplicate the data from these facilitator screens to the clipboard on your computer. Then, paste the data to a program of your choice. SIMULATION STATUS
At the top of the title bar, there’s an at-a-glance Simulation Status bar:
Simulation Operation (links to Simulation Setup General Settings)
o
Users can see the Prepare tab only
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T
This simulation is open to users
o
E A
Scenario Setup indicates: o
o
C H
Assigned scenario students will play. To change the scenario, please see Simulation Setup Manage Scenario. Run limit. To change the run limit, please see Simulation Setup Manage Scenario . I N G N O T E
CLA SS SUMMARY
OVERVIEW
T E C H N I C A L G U I D E
The Overview screen displays the status of each student r un, including:
Date and time the run was last accessed User Scenario Name (i.e., Scenario Name in the Scenario Setup screen). Whether or not the run has been completed (or the current month if incomplete) The ending Cumulative Profit for that run A “view strategy” link opens a pop-up window with the student’s strategy (if entered by the student) A “view run” link opens a new browser window with that student’s run activated. An “export run data” link exports an Excel spreadsheet populated with the complete data set from that student’s run. A “delete” link deletes that run from the administrative view (note that deleting runs allow s students to play more runs until they hit the run limit again. See General Settings .)
A P P E N D I C E S
Results can be sorted by clicking on the desired column heading. Runs can be filtered by User by typing in the Filter box as well as with the checkbox options of Show only checked run, completed runs, or by best score.
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CLASS SUMMARY
SIMULATION SUMMARY T E A C H I N G N O T E
T E C H
The Simulation Summary screen gives details about each student run, including:
N I C
Date and time the run was last accessed User Scenario Name (i.e., Scenario Name in the Scenario Setup screen). Cumulative Profit Final Market Share Cumulative Unit Sales Final Fleet Size Average Capacity Utilization Final Month Pre-Tax Profit A L G U I D
Results can be sorted by clicking on the desired column heading. Runs can be filtered by User by typing in the Filter box as well as with the checkbox options of Show only checked run, completed runs, or by best score.
E
A P P E N
CLASS SUMMARY
D
BEST SCORES I
The Best Scores screen provides a distribution histogram of completed runs for each of the five performance metrics: Cumulative Profit, Final Market Share,
C E S
Capacity Utilization, Final Month’s Profit,
and Cumulative Unit Sales. The runs are also depicted in a table below the histogram. You can click on “view run” to launch the student’s simulation in a new
browser window. From this screen, you can also Download Debrief Slides to launch a customizable PowerPoint Presentation that automatically includes class data for debrief. This is also available on the Harvard Business for Educator’s website, product 7011.
Note that the Debrief Slides will populate with histograms of all five metrics for the currently selected scenario in the drop down menu. To download histograms for a different scenario, change the selection in
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the drop down and then download the Debrief Slides again. T E A C H I N G
SIMULATION SETUP
GENERAL SETTINGS N
The General Setting s screen allows you to configure the simulation as desired for your students. Simulation Operation: There are
O T E
two options: “Students may view prepare tab only” or “Students may run the entire simulation.”
Restricting students to the Prepare section allows users to access only T
the introduction and “How to Play” C
materials.
E
H
This provides the option to show or hide N
high scores from students. If “Allow Students to View High Scores” is selected, students will see a “High Scores” link on the right side of the A
screen after they have completed the simulation. D
High
Score
Viewing:
I C L G U I E
Students May Advance to Month
allows you to pace the simulation by restricting which month students can advance to. A
Be sure to click on Save Setting s before navigating away from this page. P P E N D I C
SIMULATION SETUP
MANAGE SCENARIOS
E S
The Manage Scenarios screen allows you to configure the complexity of the simulation as desired for your students. For details on how to map this capability to pricing curriculum, please see the Teachin g Note section. This simulation includes three pre-set scenario selections— A: In tr od ucto ry , B: Intermediate, and C: Advanced . Each option when selected will default to a different default set of parameters on the right-hand panel of the screen. The simulation will be set to Scenario A by default. Click on “Edit Scenario” to activate the items on the right – the default scenario
settings can be changed, including the scenario name and description for students. The scenario name and description will be shown to students when they are on the Prepare section of the simulation.
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Click on “ Act iv ate Scen ari o” to save changes. Click on “Run Scenario” to play that scenario as a student. Note that your performance will not be T E
tracked with the class results.
Click on “Revert to Original Settings ” to go back to the default setting s for that scenario. Click on “Clear Run Count” to reset all students’ run counts to zero within the same scenario. To use a different scenario, click on “ Act iv ate Scen ari o” under the new scenario and the new scenario
A C H I
will become active. Customizable features within each scenario include:
N
G N O
Run Limit: Limit the number of times students can play the scenario. Segment Pricing Option : This option determines whether players will have to enter weekday and T
weekend pricing for each enabled region. Region Selections : This option determines whether players will be setting prices for one, two, or all three city markets. Demand Growth Profile: This option sets the basic trajectory of consumer demand throughout the simulation. Demand Seasonality Prof ile : This option will introduce some very basic seasonality to the demand model (higher rental demand in winter, etc.). Competitor Price Strategy: This option sets the strategy for Universal’s competitor. For information on
E
T
how these strategies work and how each might be pedagogically useful in the simulation, see section
C H
E
the ‘Competitive Response’ section in the Teachin g Note. Capacity Change Options : Enabling this option results in the ability for players to re-allocate their fleet N I
across regions. They will be presented with this option every three months on their Decide Input Prices screen. Demand Curves: Curves are shown for both Leisure and Business segments. Each curve can be adjusted with regard to Average Price and Curve Shape by using the pull-downs provided. Resetting the curve will return it to a default shape.
C A L G U I D
Before leaving this screen, click on Act iv ate Scen ari o to save any changes.
E
SIMUALTION SETUP
VIEW USERS A P P E N D I C E S
The View Users screen allows you to see all of the users registered in the class. You can sort each column by clicking on the column heading.
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SIMULATION SETUP
INTRO VIDEOS T E A C H I N G N O T E
The Intro Videos provides three short videos to familiarize you with the simulation:
How to Play , a basic how-to video for playing the simulation as a student (same as player video in
the Prepare section)
T
Getting Started , an introduction to the Scenario Setup screen and configuring the simulation for the C
class
H
Debrief Tools, an overview of the debrief tools available to faculty within the simulation I
E N
Note that any of these videos can be projected full- screen and shown in class (of particular use would be the “how
C
to play” video, if students have not yet watched it). Each video has an accompanying transcript.
A L
Also included on this screen is an editable PowerPoint version of the “How to Play” document available to students in the Prepare section .
G U I D E
A P P E N D I C E S
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Appendi ces
T E A C H
Ap pendix A: Co mp lementar y Res ources
I N
The following is a list of suggested teaching materials to accompany this simulation. Harvard Business School Publishing items may be reviewed and/or purchased at http://hbsp.harvard.edu.
G N O T E
Harvard Business School Cases:
Cumberland Metals (Shapiro and Sherman; HBS Publishing Product No. 580-104)
Colonial Homes (Bell and Hashem; HBS Publishing Product No. 190-008)
T
Medicines Company (Gourville; HBS Publishing Product No. 502-006)
E C H
N
Tweeter etc. (Gourville; HBS Publishing Product No. 597-028) I C A
Coca-Cola ’s New Vending Machine: Pricing to Capture Value, or Not? (King and Narayandas; HBS Publishing Product No. 500-068)
L G U I
Readings:
D
Note on Behavioral Pricing (Gourville; HBS Publishing Product No. 599-114)
Principles of Pricing (Gourville; HBS Publishing Product No. 506-021)
Pricing and the Psychology of Consumption (Gourville and Soman; HBSP Product No. R0209G)
E
A P P
Stephen J. Hoch, Xavier Drèze, & Mary E. Purk (1994), EDLP, Hi-Lo, and Margin Arithmetic, Journal of Marketing 58 (October): 16-29. E
N D I
Financial Analysis for Profit-Driven Pricing (Smith and Nagle, Sloan Management Review, 1994)
C E S
Books:
Nagle, Thomas T. and Hogan, John; The Strategy and Tactics of Pricing: A Guide to Growing More Profitably (New Jersey: Pearson Education, Inc., 2006)
Dolan, Robert J. and Simon, Hermann; Power Pricing (New York: Simon and Schuster Inc., 1996)
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Ap pendix B: Go al Sol uti ons T
The following image depicts how the simulation determines market size and market share:
E A C H
Inputs: Leisure Demand Curve Potential Leisure Demand for Orlando on weekdays in July = 100,000 Universal s Price for Orlando on weekdays in July = $50 per day
I N G N
’
O T E
Competitors Price for Orlando on weekdays in J uly = $40 per day
Leisure Demand T E C
100% H N
75%
I C
~70% of 100,000 = 70,000 A L
~55% of 100,000 = 55,000 G
50% U I D
25% E
0% $0
$20
$60
$80
$100
Universal s Price = $50 per day Competitor s Price = $40 per day ’
A
’
P P E N D I C
Allocation of Customers:
Potential Customers Who Don t Rent because prices are too high = 30,000 Potential Customers Who Will Only Rent from Competitor = 15,000 Potential Customers Who Will Be Split Evenly = 55,000 ’
Competitor: 100% of 15,000 = 15,000 50% of 55,000 = 27,500 Total Demand Captured = 42,500
E S
Universal: 0% of 15,000 = 0 50% of 55,000 = 27,500 Total Demand Captured = 27,500
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T E
Ap pendix C: Des cripti on o f t he Sim ulat ion Mo del
A C H
The model structures for all three regions are essentially identical. However, each region varies according to variables such as weekend and weekday demand, price demand elasticity, and the relative number of leisure and business customers.
I N G N O
Weekday and weekend prices for each region affect orders and revenue. Available capacity, measured by fleet size, constrains sales and can be transferred among regions every three months.
T E
T E C H N I C A L G U I D E
A P P E N D I C E S
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COMPETITOR AND CUSTOMER DYNAMICS T
Leisure and business customers rent vehicles on weekends and weekdays. Generally, more leisure customers rent on weekends and more business customers rent on weekdays, although the relative proportions vary by region. E A C H I
Sales are limited by both demand and fleet size (i.e., capacity). If orders exceed available fleet size then unfilled orders go to the competitor.
N G N O T E
T E C H N I C A L G U I D E
A P P E N D I C E S
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FINANCIALS T
Sales are limited by orders and capacity. Sales and the average price per vehicle affect revenue. Sales and unit variable cost determine variable costs. Avoidable fixed costs are determined by fleet size. Fixed cost plus avoidable fixed costs plus variable cost determine total costs. E A C H I
The profit contribution is the calculated by subtracting variable costs from revenue. Profit is revenue minus costs.
N G N O T E
T E C H N I C A L G U I D E
A P P E N D I C E S
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