978-0077729028 Chapter 14 Answers To End Of Chapter

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Chapter 14 – Pricing Concepts for Establishing Value Marketing 5th

Answers To End Of Chapter Learning Aids

Marketing Applications

1 You and your two roommates are starting a pet grooming service to help put

yourselves through college. There are two other well-established pet services in your

area. Should you set your price higher or lower than that of the competition? Justify

your answer.

Students could consider two key factors: value provided and perceptions of quality.

2 One roommate believes the most important objective in setting prices for the new pet

grooming business is to generate a large profit while keeping an eye on your

competitors’ prices; the other roommate believes it is important to maximize sales

and set prices according to what your customers expect to pay. Who is right and

why?

This question focuses on pricing strategies with particular objectives. For the

pet-grooming business, students must determine whether a profit-oriented or a

sales-oriented strategy is more appropriate. To make this determination, students need to

decide which orientation allows them to meet their overall objective of helping put

themselves through college.

3 Assume you have decided to buy an advertisement in the local newspaper to

publicize your new pet grooming service. The cost of the ad is $1,000. You have

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Chapter 14 – Pricing Concepts for Establishing Value Marketing 5th

decided to charge $40 for a dog grooming, and your variable cost are $20 for each

dog. How many dogs do you have to groom to break even on the cost of the ad?

What is your break-even point if you charge $60 per dog?

This exercise allows students to gain experience performing break-even analyses, which

require three key pieces of information: (1) the price of the service, (2) the fixed costs,

and (3) the variable costs. In this scenario, the price is what the groomers charge, the

fixed cost is the cost of the newspaper advertisement, and the variable cost is the variable

cost per grooming each dog.

4 The local newspaper ad isn’t helping much; so you decide to post your services on

an auction site, where customers can bid for your services. What should the starting

price of the auction be?

5 Is there a difference between a $5,900 Loro Piana vicuña sweater and a $150

cashmere sweater from L.L. Bean? Have you ever purchased a higher-priced product

or service because you thought the quality was better than that of a similar,

lower-priced product or service? What was the product or service? Do you believe

you made a rational choice?

There might be a difference between the $5900 sweater and the $150 sweater; the

manufacturers may use different materials, production methods, and distribution

methods.

6 A soft drink manufacturer opened a new manufacturing plant in the Mid-East. The

total fixed costs are $100 million. It plans to sell soft drinks for $6.00 for a package

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Chapter 14 – Pricing Concepts for Establishing Value Marketing 5th

of 10 12-ounce cans to retailers. Its variable costs for the ingredients are $4.00 per

package. Calculate the break-even volume. What would happen to the break-even

point if the fixed costs decreased to $50 million, or the variable costs decreased to $3

due to declines in commodity costs? What would the break-even be if the firm

wanted to make $20 million?

The break even volume can be calculated by dividing $100 million (the fixed costs) by the

contribution per unit ($6.00 – $4.00). This would give the soft drink manufacturer a

break-even volume of 50 million units.

7 On your weekly grocery shopping trip, you notice that the price of spaghetti has

gone up 50 cents a pound. How will this price increase affect the demand for

spaghetti sauce, rice, and Parmesan cheese? Explain your answer in terms of the

price elasticity of demand.

8 How do pricing strategies vary across markets that are characterized by

monopolistic, oligopolistic, monopolistic competition, and pure competition?

Students must consider the difference between market types and the effect those

differences have on pricing strategies.

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Chapter 14 – Pricing Concepts for Establishing Value Marketing 5th

9 Suppose you are in the market for a new Sharp LCD television. You see one

advertised at a locally owned store for $300 less than it costs at HHGregg. The

salesperson at the local store tells you that the television came from another retailer

in the next state that had too many units of that model. Explain who benefits and

who is harmed from such a gray market transaction: you, Sharp, HHGregg, the local

store?

10 Has the Internet helped lower the price of some types of merchandise? Justify your

answer.

11 Imagine that a pharmaceutical company has just developed a cure to a major fatal

disease. Because the firm is the only one even close to a cure for this disease, price is

inelastic, meaning it could virtually charge any price and people would pay. Discuss

the ethical implications of choosing a price.

Net Savvy

1 Several different pricing models can be found on the Internet. Each model appeals to

different customer groups. Go to www.eBay.com and try to buy this book. What

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Chapter 14 – Pricing Concepts for Establishing Value Marketing 5th

pricing options and prices are available? Do you believe that everyone will choose

the least expensive option? Why or why not? Now go to www.Amazon.com. Is there

more than one price available for this book? If so, what are those prices? Are

different versions available? If you had to buy another copy of this book, where

would you buy it, and why would you buy it there?

Some students may have purchased this book from one of these sites, but the question

asks them to examine the price differences more closely and in an analytical sense

12 Prices can vary, depending on the market being served and the novelty of the

products. Shapeways allows anyone to upload a design and get it 3D printed. The

best designs then are available to other customers to have printed in a variety of

materials. Go to https://www.youtube.com/v/qJuTM0Y7U1k and learn more about

Shapeways. Then go to its website, www.shapeways.com, and search for “Inception”

and click on the design by the user roessnakhan. Note the difference in prices of the

item to be printed in plastic versus metal. Now go to Amazon and search for

“Inception Totem” and note the prices for a similar metal totem. How does the price

of the item vary between Shape-ways and Amazon? What would account for these

differences in price? Why would a consumer purchase the product from Shapeways

instead of Amazon? How is Shapeways communicating value?

Chapter Case Study: Planet Fitness: Pricing For Success

1 What benefits do customers receive in return for the sacrifices they make when

buying a membership at Planet Fitness?

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Chapter 14 – Pricing Concepts for Establishing Value Marketing 5th

2 How does this benefit–sacrifice ratio give Planet Fitness a competitive advantage in

its industry?

3 Given its price strategy, why is it essential for Planet Fitness to continually attract

new members? Do its high-end pricing competitors face the same need? Why or why

not?

Additional Teaching Tips

This chapter introduces students to the economic influence of setting prices.

Students often find these concepts difficult to grasp. Also introduced are the 5 Cs of

pricing, company objectives and strategy implications, and break-even point

calculations.

The 5 Cs of pricing are critical for students to understand. Students often don’t

realize that other factors other than cost factors influence the pricing strategy.

Reviewing the five Cs of pricing and having students come up with examples will

help to enhance understanding of these concepts.

It is important for students to also understand that there may be other objectives other

than maximizing profit margin. Amazon.com in its first years purposely used a

competitor –oriented approach and sacrificed profit loss. The company was ridiculed by

other dot-coms until Amazon.com revealed their strategy: To have households identify

with the brand name. By pricing products and shipping low, it would increase usage of

the site. Thus, the strategy was to sacrifice profits to have Amazon.com become the

market leader and the household brand name recognition for online purchases.

The break-even point graph is often difficult for students to understand unless they have

had an economics course. Instructors will need to weigh the importance of teaching the

graph, the BEP formula, or both. Sometime will need to be spent by the instructor

explaining the graph. It is wise to give students a BEP problem such as the one listed in

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Chapter 14 – Pricing Concepts for Establishing Value Marketing 5th

the application problems and have them graph it if the instructor chooses to also teach the

dynamics of the graph.

Should students need additional help in pricing, turn to the testing materials and select

some multiple choice BEP and pricing concept (equilibrium, profit, loss, fixed cost,

variable costs) types of problems and create a worksheet where students can either work

on it independently or in small groups in the class. Often, students can help each other in

understanding these concepts and small groups are recommended. Online Tip: Have

students develop a marketing related word problem using BEP analysis. Have them post

it to the discussion board. Have other learners solve the problem. Have the student that

created the word problem come back and give feedback. You may want to pair students

up as partners in the online environment.

Remember to review the Newsletter for Instructors and its accompanied PowerPoint

presentation, which integrates examples and discussion from the newsletter. Each

newsletter contains over ten article abstracts on hot topics, plus a selection of current

commercials and videos for you to use with your class. The newsletter also includes a

guide that explains where the articles, commercials, and videos best fit in your Marketing

course.

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